4 Reasons Why Small Businesses Get Denied From Funding

  • June 14, 2019
  • By Aidan Dwyer

Acquiring working capital for a small business can seem like a daunting task. Many business owners apply for loans for many different reasons. Whether it is for expansion or just trying to make ends meet. There is a complicated process of obtaining a small business loan through a bank.  Even after going through the entire process, there is no guarantee that they will offer your business any funding. 

There are many different factors for getting approvals for business loans. Banks and alternative lenders alike have their own specific screening processes to qualify businesses for certain types of loans. Below, we have listed a few of the most common reasons small businesses get denied from financing.

Low Credit Score

Your credit score is one of the most important factors that lenders use to evaluate and qualify businesses for loans. This includes both your business credit score and your personal credit score. It actually weighs personal credit heavier than business credit.

If you are a small business owner, your personal credit is a reflection of your ability to manage debt. If you cannot manage your own personal debt, lenders will not believe you will be able to handle business debt. Repairing your personal credit score is no easy task, and generally takes time. However, if you are able to get your FICO score to over 500. Some funding options will be available for your business. Click here to learn more about our Bad Credit Business Loans.

Business Operates in a High-Risk Industry

Another reason why small businesses may be denied from business funding is due to the industry that they operate in. This is no fault to the business. Typically in the financial world, some industries are at more high risk than others. There are many factors that go into evaluating the risk of a certain industry, including tSmall Businesseshe way in which businesses in that industry receive payments, the relative overhead and profit margins of the industry, and future anticipation of the industry’s growth within the overall market. Some of the most favorable industries include restaurants or retail stores. Due to the consistent deposits those types of businesses seem to have.

One important factor used by underwriters is the failure rate of individual businesses within an industry. If you are in an industry where many businesses can fail. Lenders are less likely to look at your application favorably. What the industry features is also a factor in evaluating industry risk. Industries such as gambling and marijuana are at high risk than others. Because there are certain legal implications that go along with those industries.

Even if you work in a “high risk” industry, there are still funding options out there for you. You may just have to do some digging. It is important to be cognizant that your industry can affect your loan opportunities. If you’d like to learn more about our high risk funding options, click here.

Business Has Not Been Operational for Long Enough

Time in business is another deciding factor that lenders use when evaluating a business file. Lenders use time in business to measure a businesses’ stability. The logic behind this idea is simple. The longer that you have been in business, the more stable your business is. Newer businesses have a much higher chance of failing, regardless of how successful they currently are.

Lenders also need to see a certain amount of business credit history. If you have not been in business long enough, they may not be able to see enough business credit transactions. Most lenders will want to see at least 3 months of the transaction history. If you haven’t been in business that long, it is probably best to hold off on applying for business financing.

Business Bank Account Has Low Revenue or Unhealthy Ledgers

When you apply for any type of business financing or working capital. The financial adviser will ask you to send over some bank statements. On your bank statements, lenders will look at a multitude of different things. Your business revenue, frequency of deposits, average account balance; and the number of negative days NSF transactions are all taken into account. Negative days; One can make use of information from these statements for determining whether or not your business will make interest payments. If your business has too many days where there is not enough money or even negative money. Odds are that your business will not be able to make regular interest payments. If you want to be able to qualify for a loan. Keep your account’s balance up, and keep the number of days the account is negative / NSF to a minimum.

The most important thing to remember is that lenders review each business financing application on a case by case basis. Here at REIL Capital; we understand that working capital and business financing are vital to maintaining and growing a small business. If you would like to see what types of financing your business might qualify for, take a look at our products. 

Leave a Reply